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Applicability of Cost Volume Profit with sample calculations

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Value costing remains an important aspect of strategic business decisions. It allows decision-makers a rapid snapshot of optimal output levels with respect to variable costs, price-point, and profitability. While CVP makes several assumptions that limit its application to specifics, it remains an important part of accounting for decision-makers. (969 words, APA format, with references).

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Value costing will always be relevant to business enterprises. Simply put, it is a powerful management tool to address a problem common to every enterprise-how to sync up each element toward the common goal. "The mismatch between strategies and tactics... with the overall goals and objectives of the organization trigger most of the non-value adding activities in operations," (Gupta & Gunasekaran, 2005, pg.338). Value costing strips costs and value of window dressing, and lays objective data bare for consideration. Thankfully for the professional accountants among readers, there is no single answer for the 'correct' method, however. While simplicity is the strength of Cost-Volume-Profit (CVP) techniques, it also is its limitation.
There must always be a balance between resources and quality in any enterprise. While this may sound obvious, it strikes to the crux of CVP's usefulness. If accounting techniques are considered a spectrum, with infinitely expensive (as measured in time or money) and infinitely accurate on the right side-and free (again, as measured in time or money) but grossly over generalized at the left-CVP would lay on the left side of the spectrum, providing quick, simple information for decision making.

First, consider the concept of contribution margin (CM). Unit contribution margin is defined by the difference between revenue (R) and variable costs (VC)-where variable costs consist of whatever input per unit is required to prepare it for sale (Vakkur):
R-VC= CM (in dollars, per unit or gross) or VC/R ...

Solution Summary

The future applicability of CVP (Cost, Volume, Profit) analysis is discussed. Sample calculations are included to illustrate CVP's continued usefulness in strategic accounting.

See Also This Related BrainMass Solution

Cost-Volume-Profit Analysis, Manufacturing Overhead Application, etc.

1. Cost-Volume-Profit Analysis or Break-even Analysis
Blue Ridge Ski Resort produces a variety of snow skis. Snow skis are produced in large batches and 10 batches are produced per year. The company's controller has recently implemented an activity-based costing (ABC) system. The following information is also available:
Average selling price per pair of skis $300 per pair
Direct materials $30 per pair
Direct labor $15 per pair
Variable overhead $5 per pair
Setup cost $1,000 per batch
Total Fixed costs $30,000

Calculate the number of skis that need to be sold in order for the company to break even.

2. Manufacturing overhead allocation, Over or Under allocated Manufacturing overhead
Grisham Products Inc. manufactures engines for small scooters. At September 30, the company had 2,500 engines in inventory. The company's policy is to maintain an ending inventory equal to 8% of next month's sales. Each engine manufactured requires 45 minutes of assembly and inspecting time at a cost of $.30 per minute. Grisham applies overhead to engines at a rate of $.15 per direct labor minute.

The company expects the following sales activity for the fourth quarter of the year:
October 12,000 units
November 20,000 units
December 35,000 units

What is the projected applied manufacturing overhead cost for November?

3. Incremental Cost Analysis or Relevant Cost Analysis
Averette & Averette, a local dental practice, currently makes its own dentures for customers. The dental practice has one part-time employee who comes in weekly to make dentures. The employee is paid $150 per denture set. The direct materials and variable overhead cost per set of dentures is $75 and $25, respectively. In addition, the practice allocates $10,000 of fixed overhead to the denture-making department. The practice makes 1,000 sets of dentures per year. An outside company who specializes in the making of dentures has offered to make each set of dentures for Averette & Averette for $255 per set.

Refer to the Averette & Averette information above. What are Averette & Averette's total relevant costs to make the dentures themselves?

4. Present Value and Future Value Analysis
Mid-Town Plumbers Inc. is considering the purchase of a machine costing approximately $4,000. Using a discount rate of 20%, the present value of future cash inflows are calculated to be $4,000. To yield at least an 20% return, the actual cost of the machine should not exceed the $4,000 estimate by more than:

5. Budgeting or Forecasting for a Manufacturing Firm
Donnelly Manufacturing
Donnelly Manufacturing sells cedar birdhouses. The company has prepared the following forecast for the third quarter of 2009:
July 5,000 units
August 6,000 units
September 10,000 units

Inventory at June 30, 2009 was budgeted at 1,000 units. Management would like the desired quantity of finished goods inventory at the end of each month to be equal to 20% of next month's budgeted unit sales. October's sales are projected to be 12,000 units.

Each completed unit of finished product requires 3 square feet of cedar at a cost of $1.50 per square foot.

Refer to the Donnelly Manufacturing information above. The company has determined that it needs 10 percent of next month's raw material needs on hand at the end of each month.

The cost of the direct material that should be purchased in August is:

6. Cost Volume Profit Analysis or C V P Analysis
Charlie's Hotdog Stand
Charlie's Hotdog Stand sells hotdogs for $2.50 each. The variable costs per hotdog are $.50. Charlie's fixed costs are currently $800 per month. Charlie is considering expanding his business to three hotdog stands which will increase fixed costs per month by $1,200.

Refer to the Charlie's Hotdog Stand information above. If Charlie does expand his business to three stands, how many additional hotdogs will need to be sold per month in order to break even?

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